A Picture of the Nation 2017May 24, 2017

The past few years have been good in many respects: unemployment has declined, more Haredim have entered higher education and the labor force, employment of women is higher than ever, and social expenditure has been rising. In addition, there are substantial trends of improvement in the education system, and it appears that Israelis continue to be healthier than their European counterparts.

At the same time, Taub Center studies show worrisome trends: people are spending more on healthcare, Israel has an aging population and appropriate steps need to be taken to prepare accordingly, current sources of economic growth are not sustainable, and disposable income poverty rates continue to be higher than in any other OECD country.

These and many other findings are to be found in the Taub Center for Social Policy Studies’ new booklet A Picture of the Nation 2017. Each page of the booklet includes a graph and accompanying short text based on Taub Center studies of the past year. The booklet presents a comprehensive, user-friendly picture of the state of Israeli society and its economy in terms of macroeconomics, welfare, health, education, and labor markets.

Highlights from the Taub Center’s A Picture of the Nation 2017:

Macroeconomics: The past year has seen an increase in employment, a decline in unemployment, and a large rise in GDP; unfortunately, it appears that this positive trend will not continue and new sources of growth must be found.

The economy is growing nicely, but it is not expected to continue at its current pace. In 2016, there was a large and unexpected rise of 4% in GDP. It appears that this is an outlier and not a trend, though. The causes of growth in the past year were a one-time investment (Intel in Kiryat Gat) as well as a rise in the import of cars following expected changes in taxation. Taking a long-term view, growth in the Israeli economy has been disappointing. This was primarily due to stagnation in productivity in non-high-tech and manufacturing industries, mostly in the business sector. Labor productivity went down slightly over the past year, continuing a five-year trend, apparently also due to the entrance into the labor market of new populations with low skill levels.

Israel is ranked 22 out of 34 OECD countries in GDP per capita, and has held this ranking for a number of years. The gaps between Israel and other countries with lower rankings have narrowed, but the slow growth in income per capita may push Israel’s ranking even lower.

The employment rate in Israel today is very high and seems to have nearly peaked. A factor that is likely to lower the employment levels is the aging of the Israeli population. In the last five years, the share of those of working age in the population (ages 25-64) lowered the GDP per capita by 2 percentage points, and this trend is expected to continue and to lower growth by about 0.6% per year until the end of the decade.

In the past decade, the growth in human capital has declined considerably. After several years in which human capital was a major driver of growth, it appears that the contribution of this component to economic growth is getting close to running its course. Data show that more and more workers entering the labor market have studied at colleges opened in the past 20 years (primarily law and business majors); unfortunately, the academic quality and level of education offered at these colleges is lower than at universities.

Israel is ranked 52 in terms of ease of doing business according to a 2016 World Bank report, and below most of the OECD countries. This ranking indicates the need to streamline the bureaucratic process.

Welfare: The expenditure on welfare and on the War Against Poverty has risen, but disposable income poverty rates in Israel are still the highest in the OECD

The market income poverty rate (before taxes and transfer allowances) is lower than in most of the OECD countries. When household disposable income poverty is examined, though, Israel is in last place, along with Mexico. The large difference between the two types of poverty (market versus disposable income) indicates a lack of success of government policy in reducing poverty through taxes and the welfare system. Among other things, this is due to Israel’s low tax burden and its large populations that are characterized by low human capital, low labor participation rates, and large families.

In 2017, additional funds are expected in the War Against Poverty to bring its budget up to NIS 4 billion (about 54% of the amount recommended by the Elalouf Committee). This is higher than the NIS 1.9 billion allocated in 2016, which was about 26% of the recommended amount. The majority of the addition to the 2017 budget will be earmarked for the “Savings for Every Child” program, negative income tax and an addition to the income assurance allowance for the elderly.

Social expenditure (including education, health and welfare) was NIS 192 billion in 2015, its highest level since the beginning of the century. Total expenditure on social welfare is about NIS 94 billion, which is 21% of the total government expenditure. The majority of the rise in welfare was in the area of transfer allowances, reflecting demographic changes (like the aging of the population) and an increase in expenditure for individuals with disabilities. In contrast, expenditure in areas like institutional care and the array of social services has declined over the years.

About 80% of the Ministry of Labor and Social Affairs budget is allocated for outsourcing, and 94% of the outsourcing payments go to long-time service providers (though they comprise only 56% of the service providers).

Among households headed by individuals over age 66, the share of homeowners is 77%, and more than half of this population has an occupational pension. The share of households that neither own a home nor have income from occupational pensions declined from 20% in 2003 to 16% in 2015. The differences between population groups are substantial: long-time Jewish residents are much better off than Arab Israelis and new immigrants (although the latter’s situation has improved significantly over time).Health:Israelis are living longer and in better health, although they also spend more on healthcare. There are substantial inequalities in healthcare: low-income earners cannot afford to buy a healthy food basket and they spend a large percentage of their income on healthcare. Those living in the periphery wait longer for medical procedures

Israel is ranked in 9th place in the world in terms of life expectancy (about 82 years), and 10th place in terms of healthy life expectancy (about 71.7 years). The disease burden in Israel declined by about 17% per person between 1990 and 2015, mostly due to increased longevity. One of the most prominent factors contributing to the disease burden is diabetes, which primarily affects those with low income. In fact, its portion of the disease burden increased by about 60% over the same period. The overall health of the population in Israel is slightly better than in other leading European countries, even when one takes into account Israel’s relatively young population. The overall large advantage in disease burden is likely to recede, though, due to the aging population, and the state must take appropriate measures in time to deal with these expected demographic changes.

The rate of those purchasing supplementary insurance offered by the health funds in Israel jumped from 50% to 80% between 1999 and 2012, and some 40% of the population also purchase private insurance.

Households in the highest income quintile spend almost three times more on healthcare than households in the lowest income quintile, yet as a percentage of income, the average expenditure is far lower in the top quintile (4.8%) than in the lowest (9.5%).

In the metropolitan areas, waiting times for medical surgeries are shorter than in the periphery. For instance, waiting times in the southern district are double those of Jerusalem. In addition, in the north there are 2.2 physicians per 1,000 population, while in other districts there are at least 3.2.

A healthy food basket is not purchasable for many. The Ministry of Health recommends a Mediterranean diet rich in vegetables, fruits and whole grains. But the average family in the lowest income quintile would have to spend 65% of their income to purchase a healthy food basket, something that makes it inaccessible.

Education: The share of Arab Israelis in the education system has declined; the growth in the Haredi sector has slowed, although the share of “weak” pupils among Haredim has increased. More Haredim are beginning higher education, but many of them drop out

Following full implementation of the Compulsory Education Law for 3-4-year-olds, the share of household expenditure on preschool in national expenditure dropped from about 21% in 2011 to 11% in 2013. Alongside this, though, there was an increase in expenditure on preschool for 2-year-olds.

There have been substantial demographic changes within the education system: In the past few years, the share of Arab Israelis in the education system has fallen, and the rate of growth of the Haredi stream has slowed (although it has still grown faster than the other streams).

Between 2011 and 2014, the portion of pupils from weak backgrounds in the Haredi stream has increased, while in the Arab Israeli sector, there has been a dramatic reduction.

There has been a substantial growth in the number of Haredim studying in institutions of higher education, although the share of those holding a first degree is still very low. In 2014, 3,227 Haredim began studying for a degree and the share of Haredi students reached approximately 8% among men and 15% among women. However, only about 2.4% of Haredi men and 8.3% of Haredi women ages 25-35 actually hold an academic degree. Furthermore, when the data are broken down by Haredi streams, a substantial portion of those acquiring higher education were found to be from the National Religious stream (who studied in Haredi supervised institutions). When they are removed from the equation, only about 6% of Haredi men and 12% of Haredi women are studying for a first degree.

Labor Markets: Female employment rates are higher than ever, women work closer to home, computer literacy is quite low among Haredim and Arab Israelis, but relatively high for other Israelis.

In 2014, female employment rates in Israel reached an all-time high – 74.3% – and this rate continued throughout 2015. This figure places Israel above the OECD average (67.4%). Jewish women are employed at a particularly high rate (higher than the rate in all but one OECD country), although Arab Israeli women are employed at a lower rate than in any OECD country. Male employment rates in Israel are below the OECD average, although these gaps are closing.

The gap that had opened between real wages and worker productivity has closed since 2014. It seems that the gap opened when consumer prices, which affect real wages, increased faster than producer prices (the overall price of goods and services in the market) to which nominal wages are linked. As a result, consumer buying power eroded. The past two years have seen a rise in real wages. This, however, seems to have stemmed from the two prices first diverging and then converging, and cannot be expected to last.

An international survey of digital competency shows that only 27% of adults in Israel were ranked in the highest competency levels versus 31% on average in the other OECD countries. Among non-Haredi Jews the level of computer literacy is good relative to other countries, while among Haredim, the level is low, and even lower among Arab Israelis.

Women work fewer hours, and this is the main reason for the gender wage gap in Israel. The second most important explanatory variable for wage gaps is occupation and industry. Women tend to choose work that allows part-time employment, like teaching; occupations that are characterized by lower hourly wages. An additional factor is that women have lower attainments in math than men, and it has been shown that high achievement in math is linked to high salary levels. After weighting several variables that were likely to influence wage gaps, the portion of wage gap that remained unexplained plummeted from 30% to 6% and it is possible that the remainder is due to unobserved variables such as the propensity to bargain over salary. This suggests that it is important to examine the differences in life choices of men and women in order to understand whether wage gaps are due to discrimination or to choice.

Married women tend to work closer to home than married men, and so their opportunities are more limited; this may also explain part of the gender wage gap.

Gender polarization in choice of industrial branch may begin in high school, because although girls have higher overall achievements and higher rates of bagrut qualification, they tend not to choose the hard science majors (math, computers and physics). Girls and boys score the same on Meitzav tests in fifth grade; but, by high school, gaps have opened. To change this, girls need to be encouraged to study science and math in primary school or even earlier.

Only 27% of computer science students are female, and among computer science graduates, many are employed in education or other industry groups and not in the lucrative field they studied. This could be due to the long hours in the technology field and, if such is the case, shorter work hours or more flexible opportunities to work from home could encourage more women to enter the high-tech field.

The Taub Center for Social Policy Studies in Israel is an independent, non-partisan socioeconomic research institute. The Center provides decision makers and the public with research and findings on some of the most critical issues facing Israel in the areas of education, health, welfare, labor markets and economic policy in order to impact the decision-making process in Israel and to advance the well-being of all Israelis.